Outside of the rarefied realms of finance few people may have heard or read of the "carry trade" and the insatiable breed of speculator known as "carry traders". But in many cases these guys are vastly worse than the commodites speculators who only recently were responsible for single-handedly increasing the price of oil more than $27 a barrel. Pissed off at the pump prices? Blame these lowlifes!
The carry trade and its purveyors are just as bad. Some may even recall they incepted the Asian currency crisis ca. 1997, which sent the Thai bhat reeling, amongst other pernicious effects, including placing nearly 2 million SE Asian kids near the specter of starvation. Now, they are doing a number on the U.S. dollar, sinking it even as commodities costs soar and most ordinary folks barely have enough to buy food as it is. (A point brought home to me this a.m. while at the grocery, as a poor lady clearly on food stamps, came up $22 short on her food stamps debit card and had to pay the balance by check. Meanwhile, the carry traders are laughing all the way to their banks, or financial services cohort.)
The carry trade is a sleazy operation (but often justified by the financial elites, the same gurus of know-nothingism that nearly brought the whole global finance system down two years ago) by which low-yielding currencies such as the dollar and yen, are sold to finance riskier, higher yielding assets such as equities, commodities and commodity-linked currencies. In singleton terms, think of a typical freelancing carry trader as a character that moves money from a low interest location (like the U.S. currently, what with the Federal Reserve's near 0% rates) and exchanges that for currency in a high interest paying place. If the "spread" (difference in interest rates) is large enough, this goober makes a killing - especially if he does this every day.
Like the odious commodities speculators with which they're often linked, the big gains are made via "market positioning" and thus making bets on further rises in particular currencies, say the Aussie dollar, which causes its value to surge higher (see accompanying graph). This is similar to oil speculators, say making bets that oil prices will move higher, and of course under the pressure of vast volumes of such bets, they usually do. In the case of the currency betting, since there is a finite pool of particular carry traders, if they preferentially weigh in on one currency like the $Au - then another will fall concomitantly, and this is also illustrated (for the U.S.$) in the right segment of the diagram.
To fix ideas here, as reported in today's Financial Times, (p. 20, 'Markets & Investing') "positioning data from the Chicago Mercantile Exchange, used as a proxy for hedge fund activity, shows investors raised the values of their bets to a record $9.4 billion in the week of April 5. This has coincided with a rally in the Australian dollar that pushed it to a high of $1.0582 against the U.S. dollar, its strongest level since it was allowed to float in 1983."
Ordinarily this might not be a problem, but bear in mind that for debased or devalued curencies, all exports are going to cost more, and that includes oil in this case. Thus, oil prices are not merely contingent on supply and demand, or the follies of the oil speculators, but the cost in actual U.S. dollars. For a devalued buck, this is horrendous news! Meanwhile, the dollar index, which tracks it progress against six major currencies, has dropped to a 15 month low of 74.838, within sight of its record low from April, 2008. That means the dollar is only worth about three fourths of a theoretical parity value (assuming a buck for a buck trading).
The other culprit in this piece is, of course, the Federal Reserve! The same ones who continue to feed another asset bubble and whose policy of "QE2" (quantitative easing two) is helping to feed the frenzy of the carry traders as well as commodities speculators. All this while other advanced nations, e.g. Britain, have already had the sense to raise their interest rates.
According to one observer cited in the FT piece, the dollar will begin to gather support across the board once investors start to anticipate the end of quantitative easing. Let's hope that end happens sooner rather than later for average Americans, who could also use a little bit more interest income to tide them over!
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